Determining the Equivalent of a US Public Charity
The IRS has approved two methods for making tax-effective donations to foreign charities. Equivalency Determination is one of them.
Equivalency Determination (ED) is the method used to collect information on a foreign charitable organization in order to make a good faith determination as to whether or not it is the equivalent of a US 501(c)(3) organization. If equivalency is determined, the foreign charity becomes eligible to receive tax-effective donations from US donors.
NOTE: In situations where there are many potential hindrances to passing an Equivalency Determination review, the flexibility of Expenditure Responsibility provides grantmakers with a viable alternative.
The ED process is focused on the grantee organization as a whole, rather than focusing on one specific project. The process is detailed and can be burdensome to both the grantor and the grantee before a grant is made. However, ED enables grantmaking for a wider range of purposes, including capital assets and general operating support. It also allows a grantor to continue funding the organization as long as eligibility is maintained and can make the post-grant process more streamlined.
ED will be considered a good faith determination if it is based on written advice of a qualified tax practitioner. The ED review must examine the following items, at a minimum:
- A currently qualified affidavit attesting to certain facts that would confirm equivalency to a US Public Charity
- A detailed description of the purposes of the organization and its past and proposed activities
- A Public Support Test including detailed financial records for current year and 4 years prior (unless grantee is a school, hospital, or church)
- A copy of the grantee’s governing document
- A list of current board members
After this information is collected, it must be reviewed to ensure that the potential grantee would qualify as a 501(c)(3) public charity in the US.
With ED, foreign grantees are not legally required to submit annual reports (or until the grants are extinguished in full) in order to maintain their status and grantmakers need not provide any additional information on IRS Form 990. The self-determined reporting schedule and ability to fund unrestricted grant purposes makes ED an especially attractive option for grantmakers looking to establish a long-term relationship with a particular grantee.
Many foreign organizations may have difficulty providing the necessary documentation for ED, and the process can be prohibitive for grantors when working with a large number of organizations around the world.
ED may not always be the best solution for your cross-border giving. Differences in accounting practices, conflicting applicable laws, and translation services can all serve as significant obstacles to making an ED. Additionally, organizations with legitimate charitable purposes that incorporate as social enterprises in nations where it is very burdensome to incorporate as a nonprofit entity would not qualify for ED.
The solution may be Expenditure Responsibility (ER). ER offers US donors an alternative method for cross-border giving. Learn more here.
NGO America is a project of CAF America, a global grantmaking organization founded in 1991 and part of the CAF Global Alliance. CAF America was the first to answer Secretary of State Hillary Clinton’s call in 2012 to help U.S. donors take advantage of reduced barriers to international philanthropy. An expert in theoretical, legal, and practical challenges of cross-border giving, CAF America established NGO America to share its expertise and to provide simple solutions to this complex process.